Home Depot Sells $2 Billion of Debt to Build Cash, Buy Stock

March 28 (Bloomberg) -- Home Depot Inc., the largest U.S.
home-improvement retailer, returned to the corporate bond market
for the second time in less than seven months to rebuild its
cash stockpile and finance share buybacks.

The company sold $2 billion of 10- and 30-year bonds,
according to data compiled by Bloomberg. Home Depot will use
proceeds to replace $1 billion of 5.2 percent notes issued in
2006 that matured March 1 and to buy its own stock, according to
a Securities and Exchange Commission filing.

Moody’s Investors Service and Fitch Ratings boosted their
outlooks on Atlanta-based Home Depot to positive last week,
citing improved earnings amid a strengthening economic recovery.
Returns on the company’s debt trail the investment-grade
corporate bond market while its shares have outperformed the
Standard & Poor’s 500 this month through March 25.

“Perhaps it is planning to accelerate its share buybacks
for the year as it no doubt views its shares as undervalued,”
said Carol Levenson, director of research at Gimme Credit LLC in
Chicago, in an e-mail. Selling the debt to raise money for stock
purchases “seems very bondholder unfriendly to us,” she wrote
in a note to clients today.

Stock Repurchases

Home Depot may use as much as $2.5 billion of cash to
repurchase additional shares this year, following $2.6 billion
in buybacks in 2010, said Ted Decker, senior vice president of
retail finance, on March 7 at an investor conference. The
company plans to increase its 25-cent-a-share quarterly dividend
every year, Decker said.

Ron DeFeo, a Home Depot spokesman, declined to comment on
the bond offering beyond the SEC filing.

The sale included $1 billion of 4.4 percent notes due April
2021 that yield 97 basis points more than similar-maturity
Treasuries and $1 billion of 5.95 percent bonds maturing in
April 2041 that pay a 147 basis-point spread, Bloomberg data
show. A basis point is 0.01 percentage point.

Moody’s changed the retailer’s outlook to positive on March
25, citing the “expectation that the size of Home Depot’s
remaining share authorization will shrink over the near term,”
it said in a statement. Fitch said its outlook for the company
was positive in a March 24 statement.

Moody’s affirmed its Baa1 rating on Home Depot. Standard &
Poor’s assigned the notes an equivalent rank of BBB+, according
to a statement today. Fitch also rated the notes BBB+.

‘It Makes Sense’

“This is a company that can afford to do a little bit of
share repurchases without causing a lot of concern,” said
Joscelyn MacKay, a credit analyst at Morningstar Inc. in
Chicago. “With the consensus view being that rates are going to
go up, it makes sense that they’re trying to come to market
before that window closes.”

The retailer last sold debt on Sept. 7, when it issued $500
million of 3.95 percent, 10-year notes that yielded 135 basis
points more than similar-maturity Treasuries and the same amount
of 5.4 percent, 30-year bonds that paid a 175-basis points
spread, Bloomberg data show.

The notes due September 2020 traded March 25 at 97.83 cents
on the dollar, yielding 4.23 percent and paying a 78.3 basis-point spread, according to Trace, the bond price reporting
system of the Financial Industry Regulatory Authority. The
September 2040 issue traded at 93.98, yielding 5.83 percent and
paying a 131.2 basis-point spread, Trace data show.

The company’s bonds have lost 0.67 percent this month,
compared with a 0.02 percent gain for U.S. investment-grade
corporate debt through March 25, according to Bank of America
Merrill Lynch index data. Home Depot’s stock lost 0.13 percent,
versus a 1 percent decline in the S&P 500 over the same period.

As of Jan. 30, Home Depot had $9.7 billion of debt
outstanding, Fitch said.